The commodity markets impact almost everybody on the planet, every single day, because some derivative or variant of about everything that they consume is impacted by those prices. Whether it’s a home loan, or a piece of jewelry, or a fill up at the gas station, or a gallon of milk, or a loaf of bread — commodity pricing is vastly more important than most people actually realize.
~ Former CFTC Commissioner Bart Chilton
In theory, regulation is supposed to set and enforce the rules of the game that market participants play by, in order to ensure that price discovery remains efficient, effective — and most important — fair.
In practice, there's plenty of debate to be had on how successful our regulators are in effecting their mission. And one investment class in particular, commodities, frequently comes under criticism for questionable price action.
So, this week we talk with Bart Chilton, former Commissioner of the Commodity Futures Trading Commission (CFTC), about price discovery within the commodity markets, and whether investors can have confidence in the "fairness" of the current system.
Perhaps it will come as little surprise that Commissioner Chilton, a longtime inside player, does not see the current environment as 'broken' or 'unfair', as some critics claim. And as a former regulator, there are certain topics he is not allowed to comment on. But that said, he's a vocal advocate for several reforms that he believes will reduce the chances for manipulation within the market — particularly position size limits and better rules for high-frequency trading (HFT) algorithms:
[Position] size is an important thing to look at. That’s why in my career as a financial regulator I sought to have limits placed on speculative positions. And unfortunately, there haven’t been. Even though it’s law now, my former agency has not sought to finalize those rules.
Size does impact markets and it can push prices around. In electronic trading, even a small size can move prices just because they’re so quick. You don’t need just to have size. If you control 20% of the crude oil market, and I’ve seen that in the past, you make a big trade you can move a market. Well, today with electronic markets and high frequency traders you don’t have to have 20%. You just need 2-3%. If you put a price out there very quickly, it can move markets.
When asked directly if there's a manipulation problem in the precious metals market — silver, especially — he did not confirm or deny. Instead, he laid out the 4 pillars of evidence the CFTC looks for in determining whether manipulation can be proven: intent, size, trading action, and impact on price. From his experience during his tenure, it sounds like there were a lot of cases where many of the pillars were present, but few where all 4 were in enough abundance to overcome the "dueling economists" quagmire that ensued when bringing the case into a courtroom.
Commissioner Chilton is sympathetic to the perception many frustrated and bruised investors have about the precious metals markets — he himself is on record saying that the large short position concentrations have been outrageous — and he urges them to share their observations and demands for reform with their elected legislators. Why not the CFTC directly? Sadly, Commissioner Chilton notes, "regulators by and large aren't listening to average people".
Click the play button below to listen to Chris' interview with Bart Chilton (27m:35s)
by jim-h-2